I am a Senior Political Contributor at Forbes and the official 'token lefty,' as the title of the page suggests. However, writing from the 'left of center' should not be confused with writing for the left as I often annoy progressives just as much as I upset conservative thinkers. In addition to the pages of Forbes.com, you can find me every Saturday morning on your TV arguing with my more conservative colleagues on "Forbes on Fox" on the Fox News Network and at various other times during the week serving as a liberal talking head on other Fox News and Fox Business Network shows. I also serve as a Democratic strategist with Mercury Public Affairs.

The Fiscal Cliff Explained

It’s the phrase that will be dominating the airwaves in the days and months to come as the pundits and prognosticators leave the 2012 election behind and turn their attention to dire predictions of economic collapse should the government allow us to tumble over “the fiscal cliff.”

So, exactly what is the fiscal cliff and why is everyone so worried about it?

At its core, this economic event destined to dominate our lives for the foreseeable future is an accident of timing resulting in a one-two punch.

Think of it as the economic version of Hurricane Sandy that ripped through the northeast in the past few weeks. On its own, the hurricane could cause a lot of damage. However, when two additional weather fronts—that just happened to be in the wrong place and the wrong time—combined with the hurricane, Sandy became an exponentially devastating storm, causing loss of life and billions upon billions in property losses.

One hopes that nobody will die as a result of the fiscal cliff. However, it is very serious, indeed.

If economists are correct, the failure to resolve this problem could send the U.S. economy into a severe contraction as money is sucked out of our pockets due to a rise in the tax payments that will be required of the average American family at the very same time less money will be flowing into our pockets due to dramatic cuts in government spending.

It begins with the December 31, 2012 expiration of the Bush tax cuts. These were originally scheduled to expire at the end of 2010 but were extended two years ago in a horse trade between President Obama and the GOP controlled Congress. You may recall the December deal, following on the heels of the Republican wave election victory of 2010, wherein President Obama agreed to continue the tax cuts for all Americans in exchange for Congress agreeing to extend long-term unemployment benefits for the many Americans who were out of work.

Should the Bush tax cuts now be permitted to expire, taxes will go up for most Americans—an increase that would extend to the taxes we pay on our earnings, investments and inheritance along with the removal of a number of tax incentives that have been made available to businesses for things such as research and development.

But the expiration of the Bush tax cuts is just the beginning.

The temporary, two percent reduction in payroll taxes that the Obama administration pushed through so that consumers could have a few more dollars to spend is also scheduled to end on December 31 of this year along with the long term unemployment benefit extension mentioned above.

Adding to the misery is the reality that, beginning on January 1, some 26 million households will again become subject to the alternative minimum tax which is estimated to raise taxes for many Americans by as much as $3,700.

When it is all said and done, the expectation is that the average American household will be paying $2,000 to $3,000 more in taxes each year—leaving them with $2,000 to $3,000 less to spend in our consumer driven economy.

Not a good thing as we struggle to get the economy on a more solid footing.

But we’ve only just gotten started.

While the expiration of all these laws that have provided Americans a measure of tax relief dating back to 2001 will deliver the ‘set up’ punch, the ‘closer’ comes from the sudden and immediate reduction in government spending that hits on January 1—courtesy of the failure of the White House and the Congressional GOP to reach a more reasonable agreement in 2011 to resolve the debt ceiling crisis.

This is the ‘sequester’ you’ve heard so much about.

The cuts hit all areas of the federal budget, including a $55 billion reduction to the Pentagon’s budget in 2013, a reduction of payments to physicians participating in Medicare, substantial cuts to FEMA and the Dept. of Education budget along with a host of serious reductions across the wide ranging operations of the federal government.

What’s more, few players on either side of the political aisle actually like these large budget cuts.

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What do we think will happen? My working theory is that Obama will take any step and accept any deal that avoids the cliff. He will ignore his base and seek to give the GOP a win as long as he can show increased revenue and reduced spending.

While I wish he would take it to the people and also make the GOP vote against lowering taxes for 97% of Americans (those over 250K pay more) the one thing we can count on from Obama is that he will work hard to try and find a middle ground and he does not play chess/games with being President.

I’d love to see the various strategies that get both parties what they want in an article ! (hint hint Rick..)

What we really need is a taxation system that matches our cost of living. Since we’ve reduced the number of brackets it’s forced people into Classes. If we want to fix this nation. We need to do a taxation method based on an equation that gives diminishing returns toward a persons income. Flat tax will kill a nation. However the thing I’ve mentioned is much simpler than a flat tax and easier to cope with as well. The diminishing returns should be a curved slope. Graphically (y. x) y must equal the money earned. The x variable wouldn’t mean anything without a predefined curved path to represent the diminishing returns, but it’d mean the percentage to be paid. Technically this plan is ideal as the variables can be tweaked when determining inflation, where as the current taxation is often too slow to match it.

There a lots of things U.S. needs. Good salaries for everyone and low taxes.

The crux behind the scenes is simply that an economy’s underlying structure must favor those who are not indirectly financed via tolls. Also pharmacy is financed via tolls if the state does pay the bill. One of the few things that need to be controlled.

I live in Mid-Europe and in my country tax freedom day is August 15th. We see a steady movement from independent jobs to those jobs financed via tolls. In the end no one who is financed indirectly should have savings otherwise the one takes away the money from those shoulders who work in order to finance (initial spark) the whole dependent part of the population. This game works a long time, as long as the increase in productivity does not kill the jobs in the independent part of the real world economy and/or the increase in productivity is going to the capital an the human. In Austria we had (50/50). The first sign that something goes wrong is, if those who do the productive work get less and less and less – traditional welfare problem.

Someone who is unemployed is in exactly the same position as the worker in a company that is working mainly for the state, both limit growth by not being productive. A teacher that works in a public school is productive when the one plants vegetables and does sell those.

This structure is crucial. We pay 30 to 45% interests as part of the product price. (supply chain depth and cost of financing involved). It is irrelevant to talk about a flat tax or not.

I think what is called financial cliff, afik, would be the right intent but hurts the false – it hurts the humans and the mid-ranges. Cuts in government spending are good from the structures perspective but they are not very human.

On the other hand spend 40 billions a month for broken loans and risk that the interest will have to rise … I doubt someone will risk causing just the thought of a problem.

I am concerned by the idea that the rich aren’t paying their fair share. I was a server in restaurants for over 20 years so don’t think I was born with a silver spoon in my mouth. They make 50% of the income and pay almost 70% of the tax burden now. How much more and how many times can we keep expecting them to pay more and call it their fair share? It is also never mentioned by the president that an additional 3.8% tax will be imposed on them for help in paying for Obamacare. How much is their fair share? There aren’t enough wealthy people in this country to pay for everyone and I believe some of them sacrificed a lot to get where they are. People have different ambitions, risk-taking skills, and some people are willing to work a lot harder than others. I don’t judge them for their success, I think we should aspire to it.

Yes, have a bipartisan congress willing to work out their differences would be a great step in the right direction. I am afraid that both sides will posture until the very end. I do not have faith in Obama to compromise. And I suspect that Boehner is not willing to sacrifice too much. If they could clean up the tax code, curb entitlement spending, raise taxes in a reasonable fashion on high level people (not a huge amount), then I think that this could be a great step in the right direction. This dogmatism that we see from both sides is discouraging.

With that being said, even though you are the ‘token lefty’. It was a very well-written article and I seriously hope that things work out to the benefit of the American people.

Not have faith in Obama to compromise??? That is all he has been doing with the Republicans since he took office! Remember it was Boehner who publicly stated that they (the Republicans) were not going to compromise. In any case, the compromise deal that Obama offered Boehner was one that gave away everything but the kitchen sink – thankfully, Boehner rejected it, and that led to the present situation. I hope that Obama plays hardball now and does not give an inch. Despite all of their flag waving, bible thumping and moralizing, this new brand of Republicans seem to care little about the health of the country and working-class people, and more about consolidating power for the wealthy. I say: let the tax cuts expire and start anew with tax breaks for the working class… You can tax the wealthiest among us at a 50% rate and they will still be wealthy. Tax a working-class man or woman at 24% and that means the difference between taking out loans to send your child to college, or being able to save. We need equity and fairness: close the loopholes that allow the wealthy to off-shore their wealth, and rescind their Bush tax breaks that we have to pay for!

@ Independent_me: Yes you could tax them 50% and they would still be wealthy, but they would be wealthy in another country that doesn’t rape them financially for being successful!

All this talk about being fair, yet you want to take more from one group then another? How is it fair to tax the rich at a higher percentage then others? Technically they are already paying more even if paying at the same percentage as they pay on more money earned, yet they get the same services from the Government as those that pay less.

Please explain to me how this is “Fair”? I’m along ways away from being “wealthy” but I am also a long way from being stupid and there is no way you can talk about being fair and making others pay a higher percentage in the same breath.

If you tax the wealthiest people at a 50% rate what sort of incentive does that give them to spend their money? If a wealthy business owner is living a certain lifestyle and finds out that his taxes are going to increase so much he’s going to have to change his entire lifestyle or work to cut business expenses to make up for that change in income, which do you think he will do? I’m sure that well over 90% of them will cut business expenses which while making the business more profitable and making the owner more money will stifle growth and hurt the employees. It’s important to remember as well that we can’t force the wealthy to say in the country and like many before them they can leave the country for a country which has a friendlier tax code.